In a Special Edition letter posted on PIMCO's website, Gross, who runs the $242 billion PIMCO Total Return portfolio, wrote that he underestimated the contagion effect from the Europe debt crisis and the U.S. debt ceiling debacle.

"As Europe's crisis and the U.S. debt ceiling debacle turned developed economies toward a potential recession, the Total Return Fund had too little risk off and too much risk on," said Gross, who also shares the title of co-chief investment officer at Pacific Investment Management Co. with Mohamed El-Erian.

His fund's poor performance led Gross to simply call his open letter to investors, "Mea Culpa." It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent.

"The simple fact is that the portfolio at midyear was positioned for what we call a "New Normal" developed world economy - 2.0 percent real growth and 2 percent inflation," Gross said.

That's all changed, of course. Gross said PIMCO's internal growth forecast for developed economies "is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture."

I view this setup as favorable for US Government bonds. For starters there is no Pimco selling pressure, only potential buying pressure when Gross changes his mind.

Second, everyone seems to think the end of QE II will be the death of treasuries. While that could be the case, sentiment is so one-sided that I rather doubt it, especially is the global recovery stalls.

Third, the US dollar is towards the bottom of a broad range and any bounce could easily wipe out gains in higher yielding emerging-market debt.

Fourth, the global macro picture is weakening considerably with overheating in China, state government austerity measures in the US, and a renewed sovereign debt crisis in Europe on top of a supply shock in oil. Emerging markets are unlikely the place to be in such a setup.

Fifth, chasing yield means chasing risk, and that is on top of currency risk. Chasing risk is highly likely to fail again at some point, the only question is when.

Sixth, several interest rate hikes are priced in by the ECB this year. Will all those hikes come? I rather doubt it, and if the ECB doesn't hike, look for the US dollar to rally, perhaps significantly.

Another Gross Mistake?

I have already commented on this before and the only reason I bring it up again is because Gross may be making another mistake.

Gross now has cash levels of negative 19% according to the article. If that is still true, Gross is using leverage hoping to catch up. His play is in mortgage-backed securities.

The time to use leverage, if there was one, would have been when treasury yields were much higher and nearly everyone believed there was no risk of recession and the US dollar would go to hell.

Many plowed into the Australian dollar and Swiss Francs, not only missing a huge US treasury but also getting clobbered in Swiss Francs and the Australian dollar to boot.

I am not going to do another "Six reasons to Fade Bill Gross" post because he may be correct. However, I do not like the odds or the leverage. Here are a couple charts that show why.

I did not know the answer then and I still do not know the answer now. I also do not know when Gross put that leverage on, or his average duration on that leverage.

However I can say that 10-year treasury yields are 42 basis points higher since I wrote that post. Mortgage rates are up as well, but not as dramatically.

The risk Gross faces now is not only being wrong a second time, but being wrong with leverage.

I see little justification for leveraged plays on U.S. debt after these huge rallies. Bear in mind that point of view comes from a deflationist who thinks the US and Europe is in for another recession.